Procyclical Behavior of Institutional Investors During the Recent Financial Crisis: Causes, Impacts, and Challenges

By Michael G. Papaioannou, Joonkyu Park, Jukka Pihlman, Han van der Hoorn

September 11, 2013

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Michael G. Papaioannou, Joonkyu Park, Jukka Pihlman, and Han van der Hoorn. Procyclical Behavior of Institutional Investors During the Recent Financial Crisis: Causes, Impacts, and Challenges, (USA: International Monetary Fund, 2013) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

This paper (i) provides evidence on the procyclical investment behavior of major institutional investors during the global financial crisis; (ii) identifies the main factors that could account for such behavior; (iii) discusses the implications of procyclical behavior; and (iv) proposes a framework for sound investment practices for long-term investors. Such procyclical investment behavior is understandable and may be considered rational from an individual institution’s perspective. However, our main conclusion is that behaving in a manner consistent with longterm investing would lead to better long-term, risk-adjusted returns and, importantly, could lessen the potential adverse effects of the procyclical investment behavior of institutional investors on global financial stability.

Subject: Asset allocation, Asset and liability management, Expenditure, Financial crises, Financial institutions, Liquidity, Mutual funds, Pension spending

Keywords: Asset allocation, Asset allocation, Asset class, Asset owner, Endowment fund, Financial crisis, Flight to quality, Global, Hedge fund, Individual investor, Institutional investors, Investment behavior, Investment horizon, Liquidity, Long-term investments, Long-term investor, Mutual funds, Pension spending, Procyclicality, Risk tolerance, Sovereign investor, WP

Publication Details

Pages:

53
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2013/193
Stock No:

WPIEA2013193
ISBN:

9781484336083
ISSN:

1018-5941

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